SIPs contributed nearly half of the total inflows into equity mutual funds this year, with over Rs. 43,000 crores. And not just SIPs, the overall retail participation in mutual funds has gone up. A joint report by AMFI and Crisil states that the mutual fund industry now handles over 5 crore retail investor accounts, totaling Rs. 9.48 lakh crores in value.
This fantastic growth in retail investments has, in turn, driven a sharp increase in investments made by the Domestic Institutional Investors (DIIs) as well. DIIs include Indian mutual funds, pension funds and insurance companies. From being net sellers in 2012-13 by over Rs. 22,000 crores, mutual funds pumped in over Rs. 45,000 crores just in the first three quarters of 2016-17. In terms of value of holdings in the capital markets, mutual funds owned around 20% of the share value in the market as of December 2016, close to half that of the FIIs.
The Great Indian SIP
To understand exactly how this inflow of domestic money, especially that of retail investors, is helpful to the capital markets, we need to quickly review how money flows impact the market in the first place. 'Hot money', or investments that are made only for quick gains are detrimental to market valuations, especially when made by institutional investors in large sums. With FIIs holding a sizeable percentage of the available market capitalization in India, their purchases and sales have historically had a significant impact on the equity indices.
2003 to 2007 saw an upward trend of FII investments into India, rising from over Rs.35,000 crores to over Rs. 80,000 crores. The same period saw the BSE go from levels of over 5000 to over 20,000. Post the sub-prime financial crisis in 2008, a net FII outflow of over Rs. 40,000 crores saw the BSE crash to +9500 levels. We see this pattern repeating in 2010 and 2011. In December 2010, the BSE was over 20,000 levels with close to Rs. 1,80,000 crores being invested by FIIs. By end of 2011, FII investments had come down to around Rs. 40,000 crores, possibly triggered by S&P's Downgrading of America's credit rating from AAA to AA+; in this instance, the Sensex fell by around 5000 points.
Increase in domestic inflows gives Indian markets the resilience to withstand sudden and significant exits made by FIIs. For example, the last quarter of 2016 saw net sales of over Rs. 30,000 crores in equity by FIIs. But this time mutual funds stepped in with net purchases of almost the same amount, and the markets were able to sustain the loss of FII funds with hardly any impact. The rising share in market holdings of the DIIs also gives them the clout to make investment calls that are contrarian to FIIs, protecting the market from being swayed by one particular outlook or strategy.
The nature of funds being invested also makes a difference to the outlook for the market. Lumpsum investments, be it by foreign or domestic institutions, or even retail investors, are often short term in nature. SIPs, on the other hand, inject funds into the market in a regularized, sustained manner, with a degree of certainty as to their continuation. This allows fund managers to make real value calls and implement longer term strategies that offer better returns. The fact that a large part of the surge in India's domestic inflows comes from SIPs offers greater hope for a stable and mature market.
Upward Slope Ahead!
The good news is that all of the reasons underlying this increase in domestic flows are long term ones. With gold and real estate losing their shine, retail investors have realized the role capital markets can play in ensuring that their savings earn inflation-beating returns. Mutual funds and SIPs are obviously earning their trust as the safest vehicle for entry into the markets, and AMFI estimates that the number of SIP accounts will increase by over a crore in the next two years. Stable macroeconomic factors and energizing reforms ensure that the attractiveness of the market stays intact for domestic as well as foreign institutional investors.
In this extremely liquid scenario, however, there is one note of caution for investors. With all of this money chasing companies, valuations are at an all time high, and corrections are expected. While the outlook for the market as a whole continues to be positive, identifying individual bets that offer value growth might be difficult. Our recommendation to counter this challenge, then, is to continue investing via mutual funds, with a long term time horizon in mind. Since short term corrections are known to be expected, SIPs help you average your cost by buying more units when the cost is low, and less units when the cost is high.
So if you are one of the 1.4 crore resurgent Indian investors pumping money into the capital markets via SIP, you're already doing the right thing. Stay invested, stay profitable!